Boardroom Diversity Is Good Corporate Governance

In her article "How to Get More Women in Banks’ Senior Ranks," American Banker's Editor at Large Barbara Rehm concludes that one of the fundamental reasons why we don't see more women in "banking's inner circles" is because they lose hope. She concludes that, "one way to get more women in the C-Suite is to get more women on bank boards of directors."

Since 2009, board diversity in U.S. public companies has not moved, with women holding approximately 16% of board seats of Fortune 500 companies, an increase of less than 1%. In other words, there has been no change.

Among the lessons of the financial crisis is that entrenched boards may have contributed to the problem. According to a number of studies, board diversity can help guard against "groupthink" which is more likely to occur among cohesive groups lacking social, cultural and ideological diversity. Such cohesive boards may be less likely to identify risk factors, critique proposals or follow-up with requests for additional information. Ensuring that corporate boards include a diverse set of skills, backgrounds and personalities will help against groupthink's dislocation of corporate and shareholder interests. Therefore, board diversity is not simply a women's issue or an issue of fairness. Rather, boardroom diversity is an issue of good corporate governance.

Globally, countries have adopted a variety of approaches to increase gender diversity on corporate boards. These strategies include legislative measures such as quotas and voluntary targets, corporate governance codes and stock exchange listing rules requiring disclosure and gender diversity recommendations among selection criteria for directors.

Europe has led the way in instituting quotas. Norway began the trend in 2006, with several European Union countries following suit. In 2011, France passed legislation requiring that women comprise at least 40% of boards for listed and non-listed companies within the next six years. And, just two weeks ago, the European Commission released a proposed new law that, by 2020, 40% of non-executive directors of larger European publicly-listed companies should be women with government-controlled entities required to comply by 2018. The proposed law is temporary and is set to expire in 2028.

A growing number of countries such as Australia have favored incorporating diversity goals in corporate governance codes and listing rules. Most of these initiatives are voluntary with a comply-or-explain requirement.

U.S. regulators have adopted a more hands-off approach. In 2009, the Securities and Exchange Commission approved rules requiring management of publicly-held companies to disclose their companies' consideration of "diversity" (which the SEC does not define) in the nominating process for board members. In particular, the rule requires a company to disclose: (1) whether diversity is a factor in considering candidates for director nomination, (2) how diversity is considered in that process and (3) how the company assesses the effectiveness of its diversity policy.

The SEC determined that investors wanted access to this information after 90% of comments submitted in response to the draft rule supported disclosure of information regarding race and gender diversity.

For the most part, companies state that they do take diversity into consideration when filling board seats. However, these disclosures vary greatly. Some companies issue bland statements generally endorsing diversity, while others specify in great detail how they address board diversity. Unfortunately, in light of the lack of movement in the number of women directors at U.S. public companies, any consideration of board diversity does not appear to be translating into tangible results.

Advancements in Europe, however, are galvanizing support in the U.S. to promote women's membership on corporate boards. Admittedly, mandatory quotas are controversial and widely opposed by U.S. businesses, including the financial and banking industry that, as noted by Rehm, is already contending with significant regulatory oversight and requirements. However, there are other ways in which progress can be made. Here are some strategies for addressing the gender disparity:

The SEC can ensure that public companies provide the type of disclosure intended by its rule. Commissioner Aguilar publicly praised companies that provided investors with concrete facts and other useful information within the "spirit" of the rule. In accordance with the Dodd-Frank Act, the SEC set up The Office of Minority and Women Inclusion. This office seeks to ensure the fair inclusion of minorities and women in management, employment and business activities of all Federal Reserve Banks, the Federal Reserve Board and other federal regulatory agencies. While it doesn't address board composition, it does continue to raise awareness.

The NYSE and NASDAQ can review their listing requirements to include "best practice" recommendations regarding diversity, gender and the length of time individuals should serve on a financial company's board to encourage the turnover necessary to allow more women and other diverse candidates to be considered for those positions.

Banks and financial institutions can hire executive search firms to help educate their boards and nominating committees about the importance of diversity to good governance.

Large shareholder groups can increasingly use proxy voting to effect change on corporate boards of banks and financial institutions.

Banks and financial institutions can contact advocacy groups, such as Women Corporate Directors, that help educate boards, provide mentoring to women directors and compile lists of qualified women to serve on boards.

Maintaining diverse corporate boards enhances the quality and efficacy of leadership, which enhances shareholder value, improves financial performance and mitigates risk. These goals are at the heart of corporate objectives and directly impact the health of the broader U.S. and global economies.

Tara K. Giunta is a partner in the litigation practice of Paul Hastings and is based in the firm's Washington, D.C. office. She has extensive experience in advising companies in various industries, particularly sensitive sectors, such as technology, telecommunications, health care and defense.

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